News Aggregators and Competition among Newspapers

in the Internet

Doh-shin Jeon (Toulouse School of Economics)

Nikrooz Nasr (Toulouse School of Economics)

March, 2012

Outline

• Stylized Facts (The Advent of Internet)• Debate (Puzzle)• Model• No Aggregator• Aggregator• Extension: Opting out• Comparison• Conclusion

Stylized FactsI Advertising Revenue of Newspapers

• 45% cut since 2000 (FTC, 2010) • 80% of revenues came from advertising, and 20% came from

selling (FTC, 2010)• The newspapers are the worst in the news media

Newspapers

Magazines

Audio

Network TV

Cable TV

Online

Local TV

-10 -5 0 5 10 15 20

17%

13.9%

8.4%

6.6%

6%

1.4%

-6.3%

Percentage change in Ad revenu, 2009-2010

Source: The State of News Media

Stylized FactsI Advertising Revenue of Newspapers

• 45% cut since 2000 (FTC, 2010) • 80% of revenues came from advertising, and 20% came from

selling (FTC, 2010)• The newspapers are the worst in the news media

II Audiences • Stiff competition with new media on the internet (web-only news,

blogs and news aggregators)• The news media are losing their consumers to the online media

Cable TV

Magazines

Audio

Newspapers

Network TV

Local TV

Online

-15 -10 -5 0 5 10 15 20

17.1%

-1.5%

-3.4%

-5%

-6%

-8.9%

-13.7%

Percentage change in Audience, 2009-2010

Source: The State of News Media

Stylized FactsI Advertising Revenue of Newspapers

• 45% cut since 2000 (FTC, 2010) • 80% of revenues came from advertising, and 20% came from

selling (FTC, 2010)• The newspapers are the worst in the news media

II Audiences • Stiff competition with new media on the internet (web-only news,

blogs and news aggregators)• The news media are losing their consumers to the online media

III Aggregator• The aggregators are the most important player in online media. • Outsell (2009): 57% (Internet)=31% (agg)+8% (newspaper site)

+18%(other)

Cumulative Distribution of Internet Visits in Online Media

Source: Gentzkow and Shapiro (2010)

DebateThe effect of news aggregators on the news media, and especially on the quality of journalism is a significant concern

There are two type of arguments in this debate:

"The people who simply just pick up everything and run with it – steal our stories, we say they steal our stories – they just take them."

- Rupert Murdoch, owner of News Corp. and The Wall Street Journal

DebateThe effect of news aggregators on the news media, and especially on the quality of journalism is a significant concern

There are two type of arguments in this debate:

• News aggregators “steal” traffic from news sites. ⇒ lower quality“Copyright reform” in U.S, and “Google tax” in France

"Google makes it easy for users to find the news they are looking for and to discover new sources of information... We send more than four billion clicks each month to news publishers"

- Google, comments on FTC discussion draft, 2010

DebateThe effect of news aggregators on the news media, and especially on the quality of journalism is a significant concern

There are two type of arguments in this debate:

• News aggregators “steal” traffic from news sites. ⇒ lower quality

• News aggregators “help” newspapers to find readers for the best contents. ⇒ higher quality

Main ResultsIf the increase in attention from high quality contents is large enough, the presence of aggregator would

• changes strategic interactions of quality choices of newspapers from strategic substitutes to strategic complements.

• lead to specialized newspapers

• increases the average quality of newspapers

• improve the consumer surplus

• increases(decreases) the profit of newspapers if cost of investment is low(high).

Model (Newspapers)Newspapers

• Ideological view: Hotelling model2 {1, 2}

1 2

Model (Newspapers)Newspapers

• Ideological view: Hotelling model• Quality: , set of (a continum of) issues which newspapers cover

Each issue could be covered as high quality or low quality.

2 {1, 2}

Sµ(S) = 1

Model (Newspapers)Newspapers

• Ideological view: Hotelling model• Quality: , set of (a continum of) issues which newspapers cover

Each issue could be covered as high quality or low quality.• Strategy: , set of issues which newspaper invest to cover

them with high quality.• Advertising revenue: contents are free

2 {1, 2}

Sµ(S) = 1

si ⇢ S

Model (Consumers)Newspapers

• Ideological view: Hotelling model• Quality: , set of (a continum of) issues which newspapers cover

Each issue could be covered as high quality or low quality.• Strategy: , set of issues which newspaper invest to cover

them with high quality. • Advertising revenue: contents are free

Consumers a unit mass of consumers distributed uniformly• Ideological view: the location of a reader represents his/her

ideological view.

2 {1, 2}

S

1 2

µ(S) = 1

si ⇢ S

Model (Consumers)Newspapers

• Ideological view: Hotelling model• Quality: , set of (a continum of) issues which newspapers cover

Each issue could be covered as high quality or low quality.• Strategy: , set of issues which newspaper invest to cover

them with high quality.• Advertising revenue: contents are free

Consumers a unit mass of consumers distributed uniformly• Ideological view: the location of a reader represents his/her

ideological view.• Single-homing: they visit only one newspaper (site)

2 {1, 2}

S

si ⇢ Sµ(S) = 1

Model (Payoffs)Consumers Depending on the quality of an article, each consumer

• spends unit(s) of attention on it• gets some utility.

u0 +�u 1 + �

u0 1

Utility Attention

High quality

Low quality

Model (Payoffs)Consumers Depending on the quality of an article, each consumer

• spends unit(s) of attention on it• gets some utility.• The ideological characteristic is modeled by linear transportation

cost, t

U

2(x) = µ(s2)�u+ u0 � (1� x)t

U

1(x) = µ(s1)�u+ u0 � xt

Model (Payoffs)Newspapers

• Quadratic cost of investing (not possible to invest on half the issues).

C (µ(si)) =

(1 µ(si) >

12

cµ(si)2 µ(si) 12

Model (Payoffs)Newspapers

• Quadratic cost of investing (not possible to invest on half the issues).

• Each unit of attention generates ω dollars of advertising revenue; ω is normalized to one.

⇡i(si) = ↵i [1 + �µ(si)]� cµ(s)2

Model Assumptions

• a

• a

• a

Timing• Each newspaper i chooses .

• Each consumer chooses between the newspapers (and aggregator)

c >��

4+

�

2+

�

2

(�,�, c)

si

t < u0

0 � =�u

t< 1

No AggregatorLemma 1. Newspapers’ choice of average quality, μi, are strategic

substitutes, in the absence of aggregator.

1

2

1

2µ1

µ2

No AggregatorLemma 1. Newspapers’ choice of average quality, μi, are strategic

substitutes, in the absence of aggregator.

Proposition 1. There is a unique equilibrium in which the average

quality of newspapers is

1

2

1

2µ1

µ2

µ⇤ =� + �

4c� ��

Model (Aggregator)Aggregator’s Technology

• publishes the articles on its site with a link to the original article.• For a given issue, if it is covered by high quality, the aggregator

finds and publishes it, but if there is no high quality article, the aggregator publishes a low quality one.

• For a given issue, if the quality of both newspapers are the same (high or low) the aggregator picks one randomly.

Model (Aggregator)Aggregator and Consumers

• Benefit: Consuming more high quality contents• Cost: Consuming news with more ideological mismatch

Model (Aggregator)Aggregator and Consumers

• Benefit: Consuming more high quality contents• Cost: Consuming news with more ideological mismatch

Aggregator and Newspapers

1 + � � 1

1 0 1

No Agg AggAggNewspaper Newspaper Agg

High

Low

Model (Aggregator)Aggregator and Consumers

• Benefit: Consuming more high quality contents• Cost: Consuming news with more ideological mismatch

Aggregator and Newspapers• Business Stealing Effect: Steals the readers who would be loyal

to newspapers otherwise.Consumers are redirected to newspapers only for high quality, and spend attention on newspaper

1

x1 x2

�

2

Model (Aggregator)Aggregator and Consumers

• Benefit: Consuming more high quality contents• Cost: Consuming news with more ideological mismatch

Aggregator and Newspapers• Business Stealing Effect: Steals the readers who would be loyal

to newspapers otherwise.Consumers are redirected to newspapers only for high quality, and spend attention on newspaper

xAgg

1

x1

x2x1

x2

�

2

Model (Aggregator)Aggregator and Consumers

• Benefit: Consuming more high quality contents• Cost: Consuming news with more ideological mismatch

Aggregator and Newspapers• Business Stealing Effect: Steals the readers who would be loyal

to newspapers otherwise.Consumers are redirected to newspapers only for high quality, and spend attention on newspaper

Business Stealing

xAgg

1

x1

x2x1

x2

�

2

Model (Aggregator)Aggregator and Consumers

• Benefit: Consuming more high quality contents• Cost: Consuming news with more ideological mismatch

Aggregator and Newspapers• Business Stealing Effect: Steals the readers who would be loyal

to newspapers otherwise.Consumers are redirected to newspapers only for high quality, and spend attention on newspaper

• Market Expansion Effect: Aggregator brings revenue of for H contents from readers who would be loyal to the rival otherwise.

�

Business Stealing Market Expansion

xAgg

1

x1

x2x1

x2

�

2

AggregatorProposition 2. Given quality of 1 and 2 , newspapers strictly prefer

either max differentiation or min differentiation.

1

2

1

2

max

min

µ1

µ2

1

2

1

2

µ1 = µ2 = µm 2

�

4c� ��,1

2

�c �

2+

��

4+ �

µ1 = µ2 = µm 2

�

4c� ��,� + 2�

4c� ��

��

2+

��

4+ � < c

µ⇤

µ1

µ2

Aggregator (No Specialization)Proposition 3. Given min differentiation, there exist(s) symmetric

equilibrium(s) in which newspapers invest on the same set of issues;

1) , if

2) , if

Aggregator (Specialization)Lemma 5. Given max differentiation, quality choices are strategic

complements.

xAgg

1

x2x1

2

xAgg

1

x2x1

xAgg

1

x2x1

Quality 1

2

2

xAgg

1

x2x1

xAgg

1

x2x1

Market Expansion for 2⇒Quality 1

2

2

xAgg

1

x2x1

xAgg

1

x2x1

Market Expansion for 2⇒ ⇒

Strategic Complements

Quality 1 Quality 2

2

2

1

2

1

2µ1

µ2

Aggregator (Specialization)Proposition 4. Given max differentiation, there is a unique symmetric

equilibrium, in which newspapers invest in disjoint sets of issues;

1) , if

2) , if µM =(�� + 2�� � 2c) +

p(�� + 2�� � 2c)2 + 2�2�

��

µM =1

2c �

2� �

2+

3

4��

c >�

2� �

2+

3

4��

1

2

1

2

max

min

8� > �M

µ1

µ2

AggregatorProposition 5. There exist such that

the min differentiation is the unique class of eq

the max differentiation is the unique class of eq.

0 < �m �M

8� < �m

8� > �M

Extension (Opting out)• Publishers can remove their contents form Google news (opt out).

• However, fewer than 1 percent have opted out of the service,

-Josh Cohen, head of Google’s news division

Extension (Opting out)• Publishers can remove their contents form Google news (opt out).

• However, fewer than 1 percent have opted out of the service,

-Josh Cohen, head of Google’s news division

Proposition 6. By introducing opting out option for newspapers

i) Always there exists an eq in which every one opts out

ii) max differentiation (specialization) eq survive for

high �

Comparison: QualityProposition 7. In the maximum differentiation equilibrium, the quality

of newspapers increases compared to case of no aggregator, µM � µ⇤

1

2

1

2

µ⇤

µ1

µ2

Comparison: QualityProposition 7. In the maximum differentiation equilibrium, the quality

of newspapers increases compared to case of no aggregator, µM � µ⇤

1

2

1

2

µ⇤

µ1

µ2

Comparison: QualityProposition 7. In the maximum differentiation equilibrium, the quality

of newspapers increases compared to case of no aggregator, µM � µ⇤

1

2

1

2

µM

µ⇤

µ1

µ2

Comparison: Consumer Surplus and Profit

Proposition 8. If the presence of the aggregator leads to the

specialization equilibrium

i) Consumer surplus increases, .

ii) The profits of newspapers increases if the cost is low, and

decreases otherwise

CSM > CS⇤

9c | 8c > c : ⇡M < ⇡⇤

8c < c : ⇡M > ⇡⇤

Discussions• What matters is not c, but c/ω , where is ad revenue per attention. As

Internet decreases ω, aggregators likely to reduce newspapers profit.

• For n(>2) newspapers, max differentiation eq can exist even when δ is small, which is consistent with the fact that fewer than 1 percent have opted out of Google News.

Conclusion• The presence of aggregator may lead to specialized newspapers

• The aggregator changes strategic interactions of quality choices of newspapers from strategic substitutes to strategic complements.

• The presence of the aggregator may result in an increase in the quality.

• The aggregator is beneficial for consumers, where as it may harm newspapers.

• Even if the aggregator harms newspapers, each newspaper may prefer to keep its link with the aggregator.